NCPA - National Center for Policy Analysis

U.S. Subsidy Gets It In Hot Water With WTO

June 26, 2001

A World Trade Organization panel charged last week that a law allowing U.S. companies to set up foreign sales corporations to shield some overseas profits from taxes is an illegal subsidy and violates trade rules.

If the interim ruling is confirmed by the entire WTO in August, as expected, it could put the European Union on track to hit the U.S. with as much as $4 billion in retaliatory sanctions -- but trade experts do not think that will happen.

  • The tax break involves providing sales-tax rebates on U.S.-produced goods sold abroad through offshore units of American companies -- a practice which benefits such big exporters as the Boeing Co. and Microsoft Corp.
  • The arrangement is worth between $4 billion and $6 billion a year to American exporters.
  • When a WTO panel objected to the practice last year, Congress passed a law which replaced the then $4.1 billion benefit with the present, even more generous benefit -- so few were surprised when the Europeans went back to the WTO with complaints.

Political observers say the Bush administration must decide to defend the subsidies, or fight them to sustain international free trade.

Source: Helene Cooper, "WTO Ruling on Tax Break Has Bush in Bind," Wall Street Journal, June 25, 2001.


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